Vertical spreads can have various names. The same vertical spread could be called several different things by several different people. We have used two terms only: vertical call spread and vertical put spread. Each of these two spreads allows for two positions, long and short.
The long vertical call spread is constructed by buying one call [...]
When vertical spreads are mentioned, they quite often come with monikers such as ‘bull’ and ‘bear’. This lends most to think of vertical spreads as directional plays which is true. However, vertical spreads can be used to take advantage of two other potential trading opportunities – time decay and volatility movement.
If you are looking for [...]
To get a firm grasp of volatility’s effect on vertical spreads, let us examine three spreads against different implied volatilities while keeping the stock price constant at 67.5. These are the 60 – 65, 65 – 70 and 70 – 75 call spreads.
In-the-Money Vertical Spreads
Looking at the in-the-money spread (June 60 – 65), we see [...]
To every investor, stock market is a challenge. One wishes to meet these, aiming high profits. Is it possible to stay on the pedestal of profits at all times? Is it possible to beat the market with your every move? The answer is clearly in the negative. Profits and losses are part of this game. [...]
When it comes to option trading, the most important lesson to retain is an understanding of what’s actually being traded. The real commodity in any option trading strategy isn’t the underlying stock itself, and it has little to do directly with phrases such as implied volatility, net debit, net credit, strike price, or expiration date. [...]
Stock trading is one of the last true meritocracies. All that matters for your investment success are your own decisions. Stock trading is a precision-based activity and one tiny mistake in judgment could send you plummeting right to the bottom and result in a huge loss.
Likewise, the opposite could happen. You may make a great [...]
Back in 2003, (October and November ‘03), the giant biotech Amgen (AMGN) came under some intense pressure, trading down about $12.00 before it found what appeared to be a decent level of support, and began to consolidate. At this level, anyone interested in going long Amgen at a discounted price would be advised to do [...]
To be able to calculate the volatility of the spread, we must equalize the volatilities of the individual options.
First, let’s move the June calls by moving June’s implied volatility down from 40 to 36, a decrease of four volatility ticks. Four volatility ticks multiplied by a vega of .05 per tick gives us a value [...]
Spread traders must understand how to properly calculate accurate volatility. In order to get accurate volatility levels, you must first determine a base volatility for the two options involved in the spread. Getting a base volatility must be done because different volatilities in different months cannot and do not get weighted evenly mathematically.
Since they are [...]
Introducing the Amazing Stock Repair Strategy. This strategy involves buying one at-the-money call option while simultaneously selling two out-of-the-money call options on the same stock, in the same month.
The construction of this trade is critical. First, you must make sure to purchase exactly the equivalent amount of at-the-money call options as shares of stock you [...]